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The International Monetary Fund on Thursday cut its growth forecast for Italy and urged it to speed up reforms, warning that prospects remained weak, unemployment was "unacceptably high" and market sentiment was "fragile".

It said it was forecasting the economy would contract by 1.8 percent this year and grow by 0.7 percent next year, compared to an earlier prediction of a 1.5-percent shrinkage in 2013.

"Accelerating the momentum for reform will be essential to jumpstart growth and create jobs," the IMF said in a report after its yearly mission to Italy.

It said the beginning of a recovery could come later this year, largely due to exports and increased investment due to the payment of public arrears.

Going against current government policy, the Washington-based body also said it was opposed to an exemption on property tax for primary residences.

"The property tax on primary residence should be maintained because it is more efficient compared to other taxes," said Kenneth Kang, assistant director of the IMF's Europe department.

He also urged more privatization to boost state coffers. "The risks to the outlook are tilted to the downside," the IMF said.

Possible stumbling blocks in the future could include policy slippage, increased funding pressure on banks and a tightening of credit.

A prolonged recession would increase banks' non-performing loans, especially for the small business and construction sectors, and "raise concerns about the country's fiscal position."